When selling property, you pay capital gains tax in Spain. As a Spanish resident, capital gains tax applies even to your worldwide income, with rates of 19 - 26% on the realised capital gain. However, a number of exemptions or reductions are possible. In this article, we discuss the proportional exemption in Spanish capital gains tax when buying and selling the family home.
The proportional exemption
If you sell your family home to finance the purchase of a new family home, you are entitled to a tax reduction as a Spanish tax resident. This reduction is full or partial, depending on the realised capital gain you reinvest. Using the example below, we explain the proportional nature.
You bought a flat in Calpe 15 years ago for 120,000 euros. You paid 12,000 euros transfer taxes and 4,000 euros purchase costs. You borrowed 100,000 euros through a mortgage loan. The total investment was then 136,000 euros.
You can sell the flat today for 300,000 euros. You have 7,500 euros in selling costs (estate agent, mortgage cancellation, EPC certificate). There is still a mortgage outstanding of 25,000 euros.
The capital gain realised and the taxable basis for Spanish capital gains tax is 156,500 euros. Specifically, you owe 34,875.00 euros of capital gains tax in Spain.
You decide to reinvest the total proceeds of the sale, being 267,500 euros (300,000 - 7,500 costs - 25,000 mortgage repayment), in a new family home within the EU, for example in Altea. In that case, you will not pay capital gains tax in Spain.
However, for example, in case you reinvest 180,000 euros in your new home, the exempt capital gain is 105,308.41 euros (realised capital gain *(amount reinvested/amount to be reinvested). This means that the taxable basis for capital gains tax is EUR 51,191.59. Specifically, you will then pay 10,654.07 euros of capital gains tax in Spain.
What are the conditions of this tax relief?
There are three conditions.
- You are selling your existing family home.
- You reinvest all or part of the proceeds two years before the sale or two years after the sale of your existing family home in a new home (possibly with renovation).
- The new home will become your new family home within one year of the purchase or completion of the renovation works.
A family home is defined as a home that you have been your usual residence for more than three consecutive years, except in the case of an exceptional situation, such as divorce. Thus, the property you sell must have acquired family home status during the two years preceding the sale.
In case you have not yet reinvested in the year of sale of your existing property, you should declare this in your Spanish tax return.
Does the sale of a foreign family home also qualify?
Usually, the country where your family home is located will also be the country of your tax residence. But it is possible that you are considered a tax resident in Spain, with another (temporary) family home abroad. However, the sale of your family home outside Spain will then qualify for the exemption. However, you need to take into account the various terms and conditions. For instance, the foreign residence must qualify as a family home during two years prior to its sale.
If you paid capital gains tax in the country where your family home is located, you can usually (depending on the double taxation treaty) deduct the capital gains tax paid abroad from the capital gains tax payable in Spain. However, if the foreign capital gains tax is higher than the Spanish capital gains tax, you cannot recover any tax.